### IN THE COURT OF APPEALS OF TENNESSEE AT KNOXVILLE December 6,

2000 Session
ALLIED SOUN

D, INC., v.

EDDIE W. NEE

LY and JOHNNY

JESS DAVIS
Direct Appeal from the Circuit Court for Sevier County No. 91-299-IV Hon. O. Duane Slone, Circuit Judge

FILED MARCH 29, 2001

No. E2000-01095-COA-R3-CV

In this action alleging misrepresentation, concealment and fraud, the Trial Court granted defe

ndants summary judgment on the g

rounds that it was unr easonable for plaintiff to rely on any representation

s made by de

fendants. On app

eal, we affirm.

Tenn. R. App. P.3 Appe al as of Right; Judgme

nt of the Circuit Cour

t Affirmed.

H ERSCHEL P I CKENS F RANKS , J., delivered the opinion of the court, in which H OUSTON M. G ODDARD , P.J. , concurr ed and C HARLES D. S USANO , J R ., J., concurred in part, dissented in part, and filed an opinion.

George F. Legg, an

d Eric J. Morrison, K

noxville, Tennesse

e, for Plaintiff-

Appellant, Allied Sound, Inc.

Robert S. Stone and Katherine M. Hamilton, Knoxville, Tennessee, for Defendant-App

ellee, Eddie W. N eel y. P. Edward Pratt, Kn

oxville, Tennessee

, for Defendant

-Appellee, Johnny

Jess Davis.

OPINION

Plaintiff Allied Sound (“Allied”) obtained a judgment against Kingdom Resort, Inc. (“KRI”) in the amount of $725,000.00 for breach of contr

act. Allied could n

ot collect this

judgment because KRI later declared b ankruptcy. Then Allied filed t his suit against Ed

die Neely a

nd Jess-2-

Davis, who were the owners of KRI, alleging misrepre sentation, concealment and fraud.

In 1988, KRI was constructing a theatrical set in Sevier County to house an outdoor passion play, and Allied submitted a proposal for the installation of sound and lighting equipment for the project. KRI provided Allied with a letter of intent in February 1988 whi ch stated that it would purchase the system from Allied contingent upon securing financ ing. Allied began

ordering equipment

and commence d some work on the project, and Link, president of Allied Sound, was made aware that the financing of the sound and lighting equipment would be done through a leasing company.
Link

stated that Davis t

old him in March tha

t the lease financing was “

complete and available”, but that they

were working o

n another deal wh

ich could save them money. Link was later advised that KRI h ad selected Century Finance and that Allied should bill Century Finance for progress payments. Davis provided Link with a phone number for Steve Lundergan at Century Finance, and Lundergan

represented that Century Finance had been select

ed and Lunder

gan would be handling the lease. It was Link’s testimony that Lundergan told him to send the invoices, and that Allied would b e paid . Li nk testified that he received a purchase order from Century on April 21 which stated that other d

ocumentswould have to be executed by KRI in connection with the lease, buthe did not inquire a

s to what those documents were. The lease stated that it wascontingent upon
a letter of credit being provided, but Link stated that he did not learn of the letter of credi t requirement

until July. Link further

testified that he w

ould not have moved forward with installation of the equipment had he known of the letter of credit requirement.

Allied worked on the project and submitted invoices to Century, which were never paid. Link met with Davis and Neely on May 4 to request prog ress payments on the job, but was told
no funds were avai

la ble. At that meeting, Link testified that Neely and Davis aske d him to keep working because the mone y was set to

come in at t he end of the construct ion through the lease, and there was no provision for progress payments. The record esta blishes that KRI had been denied letters of credit by several banks as of May 4.
Summary Judgment was gra

nted previously

to Neely and Davis because Allied had recovered a judgment against KRI on the facts before the Court. On appeal, we reversed, finding that since corpo rations act throu gh their agen

ts, then “if KRI

made misreprese

ntations, some individual or individuals had to make them for it.” The Court further stated that Neely and Davis
were the age nts alleged to have made misrepresentations for KRI, and that “[t]here is nothing inconsistentbetween the misrepresentations charged in the instant case and the representa tions found in the earlier breach of contract case.” This case was remande d for trial.

After remand, defendants again moved for summary judg ment, which was granted, with the Trial Court holding it was unreasonable for Allied to rely upon any representations made by defendants on May 4.

On appeal, Allied ins

ists that there is a disputed issue of material fact as to whether-3-

the statements made by Davis constituted f raudulent misrepresentation, and whether Allied’s re lianc e on the representation

s made by de

fendants was re

asonable? Also, plain

tiff insists that Da

vis’ attorney sh

ould have been dis

qualified by

the Trial Court.

In determining whether a gen uine iss ue of material facts exists for purposes of summary judgment, w e are required to take the strongest l egi tima te view of the evidence in favor of the non-moving part

y, and a llow all reasonab

le inferences i

n favor of that pa

rty and disc

ard all countervailing evidence. Byrd v. Hall , 847 S.W.2d 208 (Tenn. 1993).

Allied argues that there is a qu e stion of fact as to whether the statements made by Davi s in Mar ch con stit uted f raudu lent m isrep resen tatio ns. Ac cordi ng to Li nk, Davis represented tha t the financing was “complete and available”, but that they were working on another deal which would
save themmoney. Davi

s later told

Link that they

had selected Cen

tury Finan

ce and Allied shou

ld bill Century Finance

for the progress payments. At the time the statements were made, KRI wa

s still negotiating with Century

regarding the lease, and

there were contingencies which KRI had not y et met.

To prove fraudulent misrepresent a tion, plaintiff must show that there was an intentional misrepresentati on of a material f

act, made wit

h know ledge of its fal

sity or rec

kless disregard for its truth. Hill v. John Banks Buick , 875 S. W. 2d 667 (Tenn. Ct. App. 1993.) The evidence establishes a disp uted issue of mate

rial fact as to

whether the financingwas “complete and available” u nder the con ditions existing between KRI and Century at that time. If , however, a misrepresentation was made in this regard, Allied must prove that it reasonably relied upon the misrepresentation to its detriment. Id.

In order to determ ine whether plaintiff’s reliance upon Davis’ statements was
reas onable, several factors must be considered, including “the plaintiff’s business expertise an d sophistication”, “the availability of the relevant information” and “the opportunity to discover the fraud.” City State Bank v. D ean Witter Re

ynolds, Inc. , 948 S.W.2d 729, 737 (Tenn. Ct. App. 1996.) In this regard, Link admits that he was given the name and number of the person at Century Finance withwhom the de fendants ha d been deali ng, and was invited to call and get more information. Link didspeak with

Lundergan at

Century Finance, and according to L ink, he was advised that Century Finance had been select

ed and that Lu

ndergan would b

e handling the le

ase. Lunder

gan als o to ld Link to send his invoices, and they would be paid. Link also acknow ledge d that he rece ived a purchase order from Century on April 21 which stated that other docume

nts were required

from KRI in connection with the lease, but hedid not inquire as to what those docume

nts were. The pur

chase order specifically states in two places that other documents

must be executed by KRI on or before a certain date, or the purchase order is “null and void.”

From the un dispu ted ma teria l evid ence a nd Li nk’s t estimony, we conclude that plaintiff’s reliance on Dav is’ state ment was unreasonable given the fact that plaintiff was put on notice at least by

April 21 that there were some conditions on the lease, and should reasonably have inquired as to what those conditions were. Plaintiff had the means to obtain the information needed-4-

and discover any

“fraud” if he ha

d simply aske

d Century fo

r a copy of

the actual lease

agreement or inquired as t o wh at a ddi tio nal doc ume nta tio n wa s re qui red b y C ent ury b efore continuing the performance. While Link asserts that he had never been involved in a lease transaction before, he
was an experienced business person, and on thi s record is charged with knowing there were contingencies to be met by a certain date in connection with the lease. Where information is reasonably

discovered, and here where the plaintiff was invited to inquire, it cannot

claim reasonabl

e reliance upon a misrepresentation. In Solomon v. First Ame rican National Bank o

f Nashville , 774 S.W.2d 935 (Tenn. Ct. App. 1989), this Court sta ted, "[g]enera

lly, a party

dealing on equa

l terms with another is not justified in rel

ying upon r

epresentations w

here the means of

knowledge are

readily within his reach."

The trial court also found that plaintiff’s reliance on statements made by Neely and Davis at the May 4 meeting (that the money was set to come in at the end of construction) was not reasonable

because plaintiff had

been found to have notice of the letter of credit requirement by that time, and because Link had testified in his deposition that he wou ld not have proceeded with the work if he had known of

th e letter of credit requirement. Allied concedes that it is bound by the previous ruling that it had notice of the letter of credit requirement by May 4, but argues that Link
was not told that KRI had applied for a letter of credit at several different banks and been turned down. Link did not, however, enquire of Neely or Da vis aboutthe letter of credit requirement, or whether the contingenc

ies in the lease

had been fulfilled, even though he was charged with knowing of both conditions at that juncture. Link conceded he should not have gone forward with the

work knowing tha t a c ont inge ncy e xisted. P laintiff’s alleged reliance on defendants’ statements were unreasonable, and we find summary judgment to be appropriate. In o rder to defeat summary judgment, the reasonableness of the reliance mus

t amount to

a genuine issue, not found here. See: Annaco, Inc., v. Corbin , 1998 WL 929637 (Tenn. Ct. App. 1998).

Plaintiff further argue

s that Davis’ coun

sel s hould have been disqua lified, because his law firm has merged

with the law firm which repre sente d Alli ed in i ts in itial lawsu it aga inst KRI. T he Trial Judge refu

sed to disqualify

Davis’ counsel. I

n Davis’ response

to plaintiff’s M

otion t o Dis qua lif y, supportin g a ff idavits and docume

nts were filed as serting that eve n though Davis’ counsel’s firm ha

d merged with

the firm which pre

viously repr

esented plaintiff

in the first lawsuit against KRI, sufficient measures had been taken to protect client confidences suc h that no conflict exis ted. Plaintiff insists that Disciplinary Rule 4-101 and Disciplinary Rule 5-105 hav e bee n violated because H eiskell, D onelson represented Allied Sound in the first lawsuit and thus had substantial communications wit h Allied of a confidential nature, and further had “co

mplete access to the records and files of Allied Sound.” Plaintiff argues that this information could have related to the action s of Neely an d Davis, and thus could be used against Allied in the present suit, and further relies on the case of Manning v. Waring, Cox, James, Skylar and Allen , 849 F.2d 222 (6 th Cir. 1988), for the proposition of the presumption that an attorney shares

his client’s confi

dences with all members of his f

irm.

In that case, the Sixth Circu

it adopted the test u sed by the Se venth Circuit in determining whether disqualif ication is warra

nted. The Court rul

ed that if the lawyer

was privy to1 Another attorne y for Heisk

ell, Donelson who r

epresented Allie

d in the lawsuit ag ainst Century Finance is apparently now deceased.

-5- confidences of the former cli ent, and if there is a substantial relationship between the subject matter of the former

and present representations, then the court must determine if the presumption of shared confidences has been rebutted. Id . One m ethod o f rebutting this presumption is to show that adequate screeni ng meas ures have been instituted to prevent the flow of confidential information from the attorney to other members of the firm. Id

.

In determining whether the presumption has been rebutted, the court is to consider “objective and verifiable e vidence” on a “c

ase-by-c asebasis.” Manning . Factors to be considered include: 1) the size and structure of the law firm, 2) the likelihood of contact between the “infected” attorney and the attorney

s r espon sible for the present representation, 3) rules which prevent the “infected” attorney from access to releva nt files, and 4) whether the “infected” attorney will share in the fee from the present litigation. Id.; see also Formal Ethics Opinion 89-F-118 (adopting the standards set forth in Manning ).

The issue in this case thus becomes whether thepresumption has been rebutted. The B oardof Professional Re sponsibility ha

s opined that scre

ening mechanis

ms should “be aim

ed a t confining disqualification t o the person who wa

s involved in the subs

tantially re lated matter and thereforeinfected with or t ainted by pr

ivileged inform

ation which is the source of the ethical problem. Isolation of the infected person would allow the other lawyers and support personnel in the firm or officeto assist in or condu ct the questioned r

epresentation f

ree from any

taint or misuse of clie nt confidences.” Formal Ethics Opinion 89-F-118. The Board specifically approved screenin

g mechanisms

which forbid discussion of sen sitive mat ters and limit availability of sensitive documents, restrict acces s to files, impose sanctions for breach of the mechanisms, and implement physical, organizational, and geographica l barriers. Id

. Plaintiff relies upon the case of Penn Mutual Life Insurance Co. v

. Cleveland Mall Associates , 841 F. Supp. 815 (E.D. Tenn. 1993). The District Court held that,

following the merger of two law firms, it wou

ld be improper to a

llow two attorney

s within the same, newly-merged firm to represent clients on different sides of an ongoi ng dispute. Thus, regardless of the screening mechanisms

implemented, the court ordered that the firm should be disqual ified. Id . In Penn Mutualand other

cases which rely upon it, such as Watson v. Ameredes , 1997 WL 772865 (Tenn. Ct. App. 1997), there

are two lawy

ers representi

ng adverse

parties in a current dispute who end up working within the same law firm. Such is not the case here.

At the outset, we note that Davis had no involvement whatsoeve r in the prior litigation, and was not calle d as a witne ss. In th is c ase t here are t wo a tto rneys 1 from Heiskell, Do nelson who previously represented Al

lied in the first law

suit against KRI

, who then with

dre w from representation of Allied following the resolution of that suit. Due to a law firm merger, these two attorneys n

ow practice in the

same firm with Pratt, who represents d efendant Davis i

n this action. The attorneys state unequivocally that they have never discussed this case. However, we are-6-

required to determine whet

her sufficient sc

reening mecha

nisms have been imp

lemented to

rebut the presumption of sha

red client confi

dences.

The attorneys involved here state in their affidavits that a conflict policy was adopted prior to and after the merger which institutes screening mechanisms for situations such as this. The screening mechanisms include limiting access to the files, limiting places where certain cases can be discussed, limiting the sharing of secretaries , and the implementa tion of a “Chinese

” wall specifically

between Pratt and the attorneys who formerly represented Allied. The attorneys further state that the files related

to the former Allied representation are maintained in off-site storage, and the files related to the current Davis representation ar e mai ntained in the firm’s Huntsville office where the infected attorneys have no acce ss. Disqualification is “a drastic remedy which should be used sparingly ” and the trial court found that it was not warranted herein, thus inherently finding that the screening

mechanisms implemented were sufficient to rebut the presumption of shared confidences. There is no sugge stion in this record which

disputes that these

mechanisms have b

een effective

ly used in this

c ase, an d giventhe preference

stated by the

Board and the Cou

rts that disqualific

ation should

be confined to only the infected atto

rneys, if po

ssible, we conclu

de that t he Trial Court’s ruling on the disqualification i

ssue was correc

t.

For the foregoing reasons, we affirm the judgment of the T

rial Court and rem

and with the cost of the appeal assessed to Allied Sound..

_________________________ H ERSCHEL P ICKENS F RANKS , J.